10-Q 1 lm_10qx9302011.htm FORM 10-Q LM_10Q_9.30.2011


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q
(Mark One)
[x]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
 
 
to
 
Commission file number: 1-8529
 
LEGG MASON, INC.
(Exact name of registrant as specified in its charter)
 
 
 
MARYLAND
 
52-1200960
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
100 International Drive - Baltimore, MD
 
21202
(Address of principal executive offices)
 
(Zip code)
 
 
 
(410) 539-0000
(Registrant’s telephone number, including area code)
 
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
X
 
No
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
Yes
X
 
No
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
X
 
Accelerated filer
 
Non-accelerated filer
 
(Do not check if a smaller reporting company)
Smaller reporting company
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
 
 
No
X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

139,772,775 shares of common stock as of the close of business on November 3, 2011.



PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited) 

 
 
September 30, 2011
 
March 31, 2011
ASSETS
Current Assets
 
 
 
 
Cash and cash equivalents
 
$
1,093,644

 
$
1,375,918

Cash and cash equivalents of consolidated investment vehicles
 
18,393

 
37,153

Restricted cash
 
5,683

 
9,253

Receivables:
 
 
 
 
Investment advisory and related fees
 
326,173

 
366,571

Other
 
73,932

 
29,466

Investment securities
 
386,228

 
400,510

Investment securities of consolidated investment vehicles
 
58,312

 
82,829

Deferred income taxes
 
82,429

 
82,174

Other
 
55,735

 
59,700

Other current assets of consolidated investment vehicles
 
4,394

 
2,982

Total current assets
 
2,104,923

 
2,446,556

Fixed assets, net
 
266,302

 
286,705

Intangible assets, net
 
3,865,477

 
3,876,775

Goodwill
 
1,282,048

 
1,311,652

Investments of consolidated investment vehicles
 
292,795

 
312,765

Deferred income taxes
 
197,524

 
232,394

Other
 
241,466

 
239,210

Other assets of consolidated investment vehicles
 
8,614

 
1,699

Total Assets
 
$
8,259,149

 
$
8,707,756

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 

Liabilities
 
 

 
 

Current Liabilities
 
 

 
 

Accrued compensation
 
$
293,553

 
$
368,164

Accounts payable and accrued expenses
 
189,440

 
207,870

Short-term borrowings
 
250,000

 
250,000

Current portion of long-term debt
 
1,008

 
792

Other
 
76,134

 
87,393

Other current liabilities of consolidated investment vehicles
 
10,238

 
54,753

Total current liabilities
 
820,373

 
968,972

Deferred compensation
 
60,353

 
92,487

Deferred income taxes
 
247,933

 
266,193

Other
 
140,466

 
90,059

Other liabilities of consolidated investment vehicles
 
4,285

 
3,553

Long-term debt
 
1,116,660

 
1,201,076

Long-term debt of consolidated investment vehicles
 
267,714

 
278,320

Total Liabilities
 
2,657,784

 
2,900,660

 
 
 
 
 
Commitments and Contingencies (Note 8)
 


 


 
 
 
 
 
Redeemable Noncontrolling Interests
 
45,628

 
36,712

 
 
 
 
 
Stockholders’ Equity
 
 
 
 
Common stock, par value $.10; authorized 500,000,000 shares; issued 139,762,432 shares and 150,218,810 shares, respectively
 
13,976

 
15,022

Additional paid-in capital
 
3,842,784

 
4,111,095

Employee stock trust
 
(35,033
)
 
(34,466
)
Deferred compensation employee stock trust
 
35,033

 
34,466

Retained earnings
 
1,632,905

 
1,539,984

Appropriated retained earnings of consolidated investment vehicle
 
5,120

 
10,922

Accumulated other comprehensive income, net
 
60,952

 
93,361

Total Stockholders’ Equity
 
5,555,737

 
5,770,384

Total Liabilities and Stockholders’ Equity
 
$
8,259,149

 
$
8,707,756

See Notes to Consolidated Financial Statements

2



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

 
 
Three Months Ended
 
Six Months Ended
 
 
September 30,
 
September 30,
 
 
2011
 
2010
 
2011
 
2010
Operating Revenues
 
 
 
 
 
 
 
 
Investment advisory fees
 
 
 
 
 
 
 
 
Separate accounts
 
$
196,019

 
$
204,214

 
$
400,812

 
$
405,186

Funds
 
376,835

 
357,491

 
776,979

 
710,190

Performance fees
 
9,984

 
19,505

 
28,598

 
42,279

Distribution and service fees
 
85,774

 
92,314

 
177,838

 
188,628

Other
 
1,285

 
1,270

 
2,778

 
2,676

Total operating revenues
 
669,897

 
674,794

 
1,387,005

 
1,348,959

Operating Expenses
 
 
 
 
 
 
 
 
Compensation and benefits
 
257,651

 
284,909

 
558,003

 
550,983

Transition-related compensation
 
12,346

 
10,974

 
23,741

 
13,687

Total compensation and benefits
 
269,997

 
295,883

 
581,744

 
564,670

Distribution and servicing
 
160,391

 
165,832

 
341,147

 
350,534

Communications and technology
 
41,571

 
39,314

 
82,072

 
79,290

Occupancy
 
35,700

 
33,492

 
68,938

 
67,167

Amortization of intangible assets
 
5,504

 
5,749

 
11,082

 
11,477

Other
 
49,882

 
46,625

 
94,804

 
85,145

Total operating expenses
 
563,045

 
586,895

 
1,179,787

 
1,158,283

Operating Income
 
106,852

 
87,899

 
207,218

 
190,676

Other Non-Operating Income (Expense)
 
 
 
 
 
 
 
 
Interest income
 
2,982

 
2,170

 
6,037

 
3,985

Interest expense
 
(21,636
)
 
(24,449
)
 
(43,997
)
 
(47,250
)
Other income (expense)
 
(35,502
)
 
33,189

 
(32,099
)
 
25,898

Other non-operating income of consolidated investment vehicles, net
 
3,081

 
4,499

 
8,183

 
2,106

Total other non-operating income (expense)
 
(51,075
)
 
15,409

 
(61,876
)
 
(15,261
)
Income Before Income Tax (Benefit) Provision
 
55,777

 
103,308

 
145,342

 
175,415

Income tax (benefit) provision
 
(1,606
)
 
26,720

 
26,261

 
53,784

Net Income
 
57,383

 
76,588

 
119,081

 
121,631

Less: Net income (loss) attributable to noncontrolling interests
 
719

 
1,253

 
2,465

 
(1,635
)
Net Income Attributable to Legg Mason, Inc.
 
$
56,664

 
$
75,335

 
$
116,616

 
$
123,266

 
 
 
 
 
 
 
 
 
Net Income per Share Attributable to Legg Mason, Inc. Common Shareholders:
 
 
 
 
 
 
 
 
Basic
 
$
0.39

 
$
0.50

 
$
0.80

 
$
0.79

Diluted
 
$
0.39

 
$
0.50

 
$
0.80

 
$
0.79

 
 
 
 
 
 
 
 
 
Weighted Average Number of Shares Outstanding:
 
 
 
 
 
 
 
 
Basic
 
143,877

 
151,416

 
146,529

 
155,746

Diluted
 
143,931

 
151,940

 
146,625

 
156,327

 
 
 
 
 
 
 
 
 
Dividends Declared per Share
 
$
0.08

 
$
0.04

 
$
0.16

 
$
0.08

See Notes to Consolidated Financial Statements

3



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Net Income
$
57,383

 
$
76,588

 
$
119,081

 
$
121,631

Other comprehensive income:
 
 


 
 
 


Foreign currency translation adjustment
(46,026
)
 
29,588

 
(32,666
)
 
19,972

Unrealized gains (losses) on investment securities:


 


 
 
 


Unrealized holding gains, net of tax provision of $124, $13, $172 and $56, respectively
186

 
20

 
253

 
85

Reclassification adjustment for losses (gains) included in net income

 

 
4

 
(3
)
Net unrealized gains on investment securities
186

 
20

 
257

 
82

Total other comprehensive income (loss)
(45,840
)
 
29,608

 
(32,409
)
 
20,054

Comprehensive Income
11,543

 
106,196

 
86,672

 
141,685

Less: Comprehensive income (loss) attributable to noncontrolling interests
719

 
1,253

 
2,465

 
(1,635
)
Comprehensive Income Attributable to Legg Mason, Inc.
$
10,824

 
$
104,943

 
$
84,207

 
$
143,320

See Notes to Consolidated Financial Statements

4



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)

 
 
Six Months Ended September 30,
 
 
2011
 
2010
COMMON STOCK
 
 
 
 
Beginning balance
 
$
15,022

 
$
16,144

Stock options and other stock-based compensation
 
7

 
35

Deferred compensation employee stock trust
 
4

 
5

Deferred compensation, net
 
120

 
141

Exchangeable shares
 

 
110

Equity Units exchanged
 
183

 

Shares repurchased and retired
 
(1,360
)
 
(1,139
)
Ending balance
 
13,976

 
15,296

SHARES EXCHANGEABLE INTO COMMON STOCK
 
 

 
 

Beginning balance
 

 
2,760

Exchanges
 

 
(2,760
)
Ending balance
 

 

ADDITIONAL PAID-IN CAPITAL
 
 

 
 

Beginning balance
 
4,111,095

 
4,447,612

Stock options and other stock-based compensation
 
9,800

 
18,438

Deferred compensation employee stock trust
 
1,477

 
1,448

Deferred compensation, net
 
16,487

 
16,138

Exchangeable shares
 

 
2,650

Equity Units exchanged
 
102,831

 

Shares repurchased and retired
 
(398,906
)
 
(335,262
)
Ending balance
 
3,842,784

 
4,151,024

EMPLOYEE STOCK TRUST
 
 

 
 

Beginning balance
 
(34,466
)
 
(33,095
)
Shares issued to plans
 
(1,481
)
 
(1,301
)
Distributions and forfeitures
 
914

 
249

Ending balance
 
(35,033
)
 
(34,147
)
DEFERRED COMPENSATION EMPLOYEE STOCK TRUST
 
 

 
 

Beginning balance
 
34,466

 
33,095

Shares issued to plans
 
1,481

 
1,301

Distributions and forfeitures
 
(914
)
 
(249
)
Ending balance
 
35,033

 
34,147

RETAINED EARNINGS
 
 

 
 

Beginning balance
 
1,539,984

 
1,316,981

Net income attributable to Legg Mason, Inc.
 
116,616

 
123,266

Dividends declared
 
(23,695
)
 
(12,737
)
Ending balance
 
1,632,905

 
1,427,510

APPROPRIATED RETAINED EARNINGS OF CONSOLIDATED INVESTMENT VEHICLES
 
 

 
 

Beginning balance
 
10,922

 

Cumulative effect of change in accounting principle
 

 
24,666

Net loss reclassified to appropriated retained earnings
 
(5,802
)
 
(2,650
)
Ending balance
 
5,120

 
22,016

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET
 
 

 
 

Beginning balance
 
93,361

 
58,227

Unrealized holding gains on investment securities, net of tax
 
257

 
82

Foreign currency translation adjustment
 
(32,666
)
 
19,972

Ending balance
 
60,952

 
78,281

TOTAL STOCKHOLDERS’ EQUITY
 
$
5,555,737

 
$
5,694,127

See Notes to Consolidated Financial Statements

5



LEGG MASON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
 
Six Months Ended
 
 
September 30,
 
 
2011
 
2010
Cash Flows from Operating Activities
 
 
 
 
Net Income
 
$
119,081

 
$
121,631

Adjustments to reconcile Net Income to net cash provided by operations:
 
 
 
 
Depreciation and amortization
 
45,045

 
52,498

Imputed interest for 2.5% convertible senior notes
 
19,230

 
18,055

Accretion and amortization of securities discounts and premiums, net
 
2,381

 
2,372

Stock-based compensation
 
25,948

 
25,230

Net losses (gains) on investments
 
37,846

 
(22,454
)
Net losses of consolidated investment vehicles
 
2,198

 
1,996

Deferred income taxes
 
17,701

 
42,062

Other
 
901

 
1,424

Decrease (increase) in assets:
 
 
 
 
Investment advisory and related fees receivable
 
40,218

 
7,112

Net purchases of trading investments
 
(44,822
)
 
(33,260
)
Other receivables
 
(3,605
)
 
(6,802
)
Other assets
 
14,419

 
2,783

Increase (decrease) in liabilities:
 
 
 
 
Accrued compensation
 
(73,968
)
 
1,260

Deferred compensation
 
(32,134
)
 
(18,702
)
Accounts payable and accrued expenses
 
(18,370
)
 
(251
)
Other liabilities
 
9,186

 
(52,161
)
Net increase in operating assets and liabilities of consolidated investment vehicles, including cash
 
6,914

 
18,838

Cash Provided by Operating Activities
 
168,169

 
161,631

Cash Flows Provided by (Used for) Investing Activities
 
 

 
 

Payments for fixed assets
 
(14,577
)
 
(11,673
)
Restricted cash
 
7,705

 

Purchases of investment securities
 
(3,754
)
 
(3,541
)
Proceeds from sales and maturities of investment securities
 
3,590

 
2,682

Purchases of investments by consolidated investment vehicles
 
(113,668
)
 
(65,398
)
Proceeds from sales and maturities of investments by consolidated investment vehicles
 
123,765

 
67,006

Cash Provided by (Used for) Investing Activities
 
3,061

 
(10,924
)
Cash Flows Used for Financing Activities
 
 
 
 
Third-party distribution financing, net
 

 
(1,639
)
Repayment of principal on long-term debt
 
(391
)
 
(2,588
)
Repurchases of common stock
 
(400,266
)
 
(336,401
)
Issuance of common stock
 
1,453

 
9,356

Dividends paid
 
(21,029
)
 
(11,467
)
Net (repayments) borrowings of consolidated investment vehicles
 
(18,309
)
 
4,865

Net subscriptions received from noncontrolling interest holders
 
649

 
438

Cash Used for Financing Activities
 
(437,893
)
 
(337,436
)
Effect of Exchange Rate Changes on Cash
 
(15,611
)
 
4,740

Net Decrease in Cash and Cash Equivalents
 
(282,274
)
 
(181,989
)
Cash and Cash Equivalents at Beginning of Period
 
1,375,918

 
1,465,888

Cash and Cash Equivalents at End of Period
 
$
1,093,644

 
$
1,283,899

See Notes to Consolidated Financial Statements

6



LEGG MASON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts, unless otherwise noted)
September 30, 2011
(Unaudited)

1.
Interim Basis of Reporting

The accompanying unaudited interim consolidated financial statements of Legg Mason, Inc. and its subsidiaries (collectively “Legg Mason”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. The interim consolidated financial statements have been prepared using the interim basis of reporting and, as such, reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the periods presented. The preparation of interim consolidated financial statements requires management to make assumptions and estimates that affect the amounts reported in the interim consolidated financial statements and accompanying notes. Actual amounts could differ from those estimates and the differences could have a material impact on the interim consolidated financial statements.

The nature of our business is such that the results of any interim period are not necessarily indicative of the results of a full year. The fiscal year-end condensed balance sheet was derived from audited financial statements and, in accordance with interim financial information standards, does not include all disclosures required by U.S. GAAP for annual financial statements.  Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation.

The information contained in the interim consolidated financial statements should be read in conjunction with our latest Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Unless otherwise noted, all per share amounts for the six months ended September 30, 2010, include both common shares of Legg Mason and shares issued in connection with the acquisition of Legg Mason Canada Inc., which were exchangeable into common shares of Legg Mason on a one-for-one basis at any time. During the quarter ended June 30, 2010, all outstanding exchangeable shares were converted into shares of Legg Mason common stock.

Terms such as “we,” “us,” “our,” and “company” refer to Legg Mason.

2.
Significant Accounting Policies

Consolidation
In accordance with financial accounting standards on consolidation, Legg Mason consolidates and separately identifies certain sponsored investment vehicles, the most significant of which is a collateralized loan obligation entity (“CLO”).  The consolidation of these investment vehicles has no impact on Net Income Attributable to Legg Mason, Inc. and does not have a material impact on Legg Mason's consolidated operating results.  Legg Mason also holds investments in certain consolidated sponsored investment funds and the change in the value of these investments, which is recorded in Other non-operating income (expense), is reflected in its Net Income, net of amounts allocated to noncontrolling interests.  Also, see Note 12 for additional information regarding the consolidation of investment vehicles.

Business Realignment and Goodwill
In connection with a realignment of its executive management team during fiscal 2011, Legg Mason no longer manages its business in two operating segments (divisions), and during the June 2011 quarter, eliminated the previous separation of the Americas and International divisions and combined them into one operating segment, Global Asset Management. Legg Mason believes this structure allows the Company to function as a global organization with a single purpose. Internal management reporting has been modified consistent with this realignment such that discrete financial information regularly received by the chief operating decision maker, our Chief Executive Officer, is at the consolidated Global Asset Management business level. As a result, the former Americas and International operating segments are no longer our reporting units, and subsequently, goodwill is recorded and evaluated at one Global Asset Management reporting unit level.

Restructuring Costs
In May 2010, Legg Mason's management committed to a plan to streamline its business model as further described in Note 11. The costs anticipated in connection with this plan primarily relate to employee termination benefits, incentives to retain employees during the transition period, charges for consolidating leased office space, and contract termination costs. Termination benefits, including severance, and retention incentives are recorded as Transition-related compensation in the Consolidated Statements of Income. These compensation items require employees to provide future service and are therefore expensed ratably over the

7



required service period. Expense recognition of contractual lease payments may be accelerated when the related space is either permanently abandoned or subleased at a loss. Contract termination and other costs are expensed when incurred.

Income Taxes
During the quarter ended September 30, 2010, the United Kingdom ("U.K.") Finance Bill 2010 was enacted, which reduced the main U.K. corporate tax rate from 28% to 27%. In July 2011, The U.K. Finance Act 2011 (the "Act") was enacted. The Act further reduced the main U.K. corporate tax rate from 27% to 26% effective April 1, 2011, and from 26% to 25% effective April 1, 2012. The reductions in the U.K. corporate tax rate resulted in tax benefits of $18,268 and $8,878, recognized in the quarters ended September 30, 2011 and 2010, respectively, as a result of the revaluation of deferred tax assets and liabilities at the new rates. As a result of the revaluation adjustments, the effective tax rate for the three and six months ended September 30, 2011, was reduced by 32.8 percentage points and 12.6 percentage points, respectively. Similarly, the effective tax rate for the three and six months ended September 30, 2010, was reduced by 8.6 percentage points and 5.1 percentage points, respectively.

Noncontrolling interests
Noncontrolling interests related to certain consolidated investment vehicles ("CIVs") are classified as redeemable noncontrolling interests since investors in these funds may request withdrawals at any time.  Redeemable noncontrolling interests as of and for the six months ended September 30, 2011 and 2010, were as follows:

 
 
Six Months Ended
 
 
September 30,
 
 
2011
 
2010
Balance, beginning of period
 
$
36,712

 
$
29,577

Net income attributable to redeemable noncontrolling interests
 
8,267

 
1,015

Net subscriptions received from noncontrolling interest holders
 
649

 
438

Balance, end of period
 
$
45,628

 
$
31,030


Recent Accounting Developments
In September 2011, the Financial Accounting Standards Board updated the guidance on the annual goodwill test for impairment. The update permits companies to assess qualitative factors to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the currently required quantitative fair value assessment. This update will be effective for Legg Mason in fiscal 2013, if not adopted early.  This update is not expected to have a material effect on its recorded goodwill, but Legg Mason is currently evaluating its adoption.

3. Fair Values of Assets and Liabilities

The disclosures below include details of Legg Mason’s assets and liabilities that are measured at fair value, excluding assets and liabilities of CIVs. See Note 12, Variable Interest Entities and Consolidation of Investment Vehicles, for information related to the assets and liabilities of CIVs that are measured at fair value.


8



The fair values of financial assets and (liabilities) of the Company were determined using the following categories of inputs:

 
 
As of September 30, 2011
 
 
Quoted prices in active markets
(Level 1)
 
Significant other observable
inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
Cash equivalents(1):
 
 
 
 
 
 
 
 
Money market funds
 
$
639,200

 
$

 
$

 
$
639,200

Time deposits
 

 
41,346

 

 
41,346

Total cash equivalents
 
639,200

 
41,346

 

 
680,546

Investment securities:
 
 

 
 

 
 

 
 

Trading investments relating to long-term incentive compensation plans(2)
 
100,822

 

 

 
100,822

Trading proprietary fund products and other investments(3)
 
140,672

 
79,008

 
179

 
219,859

Equity method investments relating to long-term incentive compensation plans, proprietary fund products and other investments(4)(5)
 
14,111

 
39,831

 
11,605

 
65,547

Total current investments
 
255,605

 
118,839

 
11,784

 
386,228

Available-for-sale investment securities
 
2,107

 
9,757

 
12

 
11,876

Investments in partnerships, LLCs and other
 

 

 
28,469

 
28,469

Equity method investments in partnerships and LLCs(5)
 
1,184

 

 
160,662

 
161,846

Derivative assets:
 
 
 
 
 


 
 

Currency and market hedges
 
9,415

 

 

 
9,415

Other investments
 

 

 
121

 
121

 
 
$
907,511

 
$
169,942

 
$
201,048

 
$
1,278,501

Liabilities:
 
 

 
 

 
 

 
 

Derivative liabilities:
 
 

 
 

 
 

 
 

Currency and market hedges
 
$
(1,081
)
 
$

 
$

 
$
(1,081
)

9




 
 
As of March 31, 2011
 
 
Quoted prices in active markets
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
 
Cash equivalents(1):
 
 
 
 
 
 
 
 
Money market funds
 
$
912,951

 
$

 
$

 
$
912,951

Time deposits
 

 
92,877

 

 
92,877

Total cash equivalents
 
912,951

 
92,877

 

 
1,005,828

Investment securities:
 
 

 
 

 
 

 
 

Trading investments relating to long-term incentive compensation plans(2)
 
120,107

 

 

 
120,107

Trading proprietary fund products and other investments(3)
 
90,123

 
102,562

 
11,378

 
204,063

Equity method investments relating to long-term incentive compensation plans, proprietary fund products and other investments(4)(5)
 
15,645

 
48,528

 
12,167

 
76,340

Total current investments
 
225,875

 
151,090

 
23,545

 
400,510

Available-for-sale investment securities
 
2,666

 
8,622

 
12

 
11,300

Investments in partnerships, LLCs and other
 

 

 
22,167

 
22,167

Equity method investments in partnerships and LLCs(5)
 
1,420

 

 
153,931

 
155,351

Derivative assets:
 
 
 
 
 
 
 
 

Currency and market hedges
 
1,169

 

 

 
1,169

Other investments
 

 

 
270

 
270

 
 
$
1,144,081

 
$
252,589

 
$
199,925

 
$
1,596,595

Liabilities:
 
 

 
 

 
 

 
 

Derivative liabilities:
 
 

 
 

 
 

 
 

Currency and market hedges
 
$
(3,120
)
 
$

 
$

 
$
(3,120
)

(1)
Cash equivalents include highly liquid investments with original maturities of 90 days or less. Cash investments in actively traded money market funds are measured at NAV and are classified as Level 1.  Cash investments in time deposits are measured at amortized cost, which approximates fair value because of the short time between the purchase of the instrument and its expected realization, and are classified as Level 2.
(2)
Primarily mutual funds where there is minimal market risk to the Company as any change in value is primarily offset by an adjustment to compensation expense and related deferred compensation liability.
(3)
Total proprietary fund products and other investments primarily represent mutual funds that are invested approximately 63% and 37% in equity and debt securities as of September 30, 2011, respectively, and were invested approximately 60% and 40% in equity and debt securities as of March 31, 2011, respectively.
(4)
Includes investments under the equity method (which approximates fair value) relating to long-term incentive compensation plans of $39,831 and $48,528 as of September 30, 2011, and March 31, 2011, respectively, and proprietary fund products and other investments of $25,716 and $27,812 as of September 30, 2011, and March 31, 2011, respectively, which are classified as Investment securities on the Consolidated Balance Sheets.
(5)
Equity method investments are substantially all investment companies which record their underlying investments at fair value.  Fair value is measured using Legg Mason's share of the investee's underlying net income or loss, which is predominately representative of fair value adjustments in the investments held by the equity method investee.


10



In accordance with new accounting guidance adopted during the three months ended June 30, 2011, the changes in financial assets measured at fair value using significant unobservable inputs (Level 3) for the three and six months ended September 30, 2011, are now presented on a gross basis in the tables below:
 
 
Value as of June 30, 2011
 
Purchases
 
Sales
 
Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of September 30, 2011
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading proprietary fund products and other investments
 
$
280

 
$

 
$
(100
)
 
$

 
$

 
$
(1
)
 
$
179

Equity method investments in proprietary fund products
 
12,240

 

 

 

 

 
(635
)
 
11,605

Investments in partnerships, LLCs and other
 
21,952

 
6,932

 

 
106

 

 
(521
)
 
28,469

Equity method investments in partnerships and LLCs
 
143,107

 
24,174

 
(1,636
)
 
(619
)
 

 
(4,364
)
 
160,662

Other investments
 
1,254

 

 

 
(159
)
 

 
(962
)
 
133

 
 
$
178,833

 
$
31,106

 
$
(1,736
)
 
$
(672
)
 
$

 
$
(6,483
)
 
$
201,048


 
 
Value as of June 30, 2010
 
Purchases, sales, issuances and settlements, net
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of September 30, 2010
Assets:
 
 
 
 
 
 
 
 
 
 
Trading proprietary fund products and other investments
 
$
19,211

 
$
(2,500
)
 
$

 
$
1,352

 
$
18,063

Equity method investments in proprietary fund products
 
11,611

 

 

 
278

 
11,889

Investments in partnerships, LLCs and other
 
22,759

 
287

 

 
4

 
23,050

Equity method investments in partnerships and LLCs
 
139,747

 
2,198

 

 
12,473

 
154,418

Other investments
 
1,470

 
(6
)
 

 
12

 
1,476

 
 
$
194,798

 
$
(21
)
 
$

 
$
14,119

 
$
208,896



11



 
 
Value as of March 31, 2011
 
Purchases
 
Sales
 
Settlements/ Other
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of September 30, 2011
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading proprietary fund products and other investments
 
$
11,378

 
$

 
$
(11,741
)
 
$

 
$

 
$
542

 
$
179

Equity method investments in proprietary fund products
 
12,167

 

 

 

 

 
(562
)
 
11,605

Investments in partnerships, LLCs and other
 
22,167

 
6,932

 

 
(109
)
 

 
(521
)
 
28,469

Equity method investments in partnerships and LLCs
 
153,931

 
25,504

 
(3,293
)
 
(12,697
)
 

 
(2,783
)
 
160,662

Other investments
 
282

 

 

 
(159
)
 

 
10

 
133

 
 
$
199,925

 
$
32,436

 
$
(15,034
)
 
$
(12,965
)
 
$

 
$
(3,314
)
 
$
201,048



 
 
Value as of March 31, 2010
 
Purchases, sales, issuances and settlements, net
 
Transfers
 
Realized and unrealized gains/(losses), net
 
Value as of September 30, 2010
Assets:
 
 
 
 
 
 
 
 
 
 
Trading proprietary fund products and other investments
 
$
22,459

 
$
(5,000
)
 
$

 
$
604

 
$
18,063

Equity method investments in proprietary fund products
 
12,090

 

 

 
(201
)
 
11,889

Investments in partnerships, LLCs and other
 
23,049

 
(3
)
 

 
4

 
23,050

Equity method investments in partnerships and LLCs
 
98,968

 
40,521

 

 
14,929

 
154,418

Other investments
 
1,464

 

 

 
12

 
1,476

 
 
$
158,030

 
$
35,518

 
$

 
$
15,348

 
$
208,896


Realized and unrealized gains and losses recorded for Level 3 investments are included in Other income (expense) on the Consolidated Statements of Income.  Total unrealized (losses) gains for Level 3 investments relating only to those assets still held at the reporting date were $(6,487) and $6,048 for the three months ended September 30, 2011 and 2010, respectively. Total unrealized (losses) gains for Level 3 investments relating only to those assets still held at the reporting date were $(5,419) and $4,824 for the six months ended September 30, 2011 and 2010, respectively.

There were no significant transfers between Levels 1 and 2 during the six months ended September 30, 2011 and 2010.


12



As a practical expedient, Legg Mason relies on the net asset value of certain investments as their fair value.  The net asset values that have been provided by the investees have been derived from the fair values of the underlying investments as of the reporting date.  The following table summarizes, as of September 30, 2011, the nature of these investments and any related liquidation restrictions or other factors which may impact the ultimate value realized.

Category of Investment
Investment Strategy
 
Fair Value Determined Using NAV
 
Unfunded Commitments
 
Remaining Term
Funds-of-hedge funds
Global, fixed income, macro, long/short equity, natural resources, systematic, emerging market, European hedge
 
$
67,345

(1) 
n/a

 
n/a
Hedge funds
Fixed income - developed market, event driven, fixed income - hedge, relative value arbitrage, European hedge
 
28,611

(2) 
$
20,000

 
n/a
Private equity funds
Long/short equity
 
28,651

(2) 
5,775

 
6 to 9 years
Private fund
Fixed income, residential and commercial mortgage-backed securities
 
80,667

(2) 
n/a

 
7 years, subject to two one-year extensions
Other
Various
 
2,215

(2) 
n/a

 
Various (3)
Total
 
 
$
207,489

 
$
25,775

 
 
 
n/a-not applicable
(1) 73% monthly redemption; 27% quarterly redemption, of which 37% is subject to two-year lock-up.
(2) Liquidations are expected over the remaining term.
(3) 4% remaining term of less than one year; 96% 20-year remaining term.

There are no current plans to sell any of these investments.

4. Fixed Assets

Fixed assets consist of equipment, software and leasehold improvements.  Equipment consists primarily of communications and technology hardware and furniture and fixtures.  Software includes purchased software and internally developed software. Fixed assets are reported at cost, net of accumulated depreciation and amortization.  The following table reflects the components of fixed assets as of:

 
 
September 30, 2011
 
March 31, 2011
Equipment
 
$
198,740

 
$
200,696

Software
 
209,768

 
224,026

Leasehold improvements
 
278,444

 
280,277

Total cost
 
686,952

 
704,999

Less: accumulated depreciation and amortization
 
(420,650
)
 
(418,294
)
Fixed assets, net
 
$
266,302

 
$
286,705


Depreciation and amortization expense included in operating income was $16,661 and $20,097 for the three months ended September 30, 2011 and 2010, respectively, and $33,963 and $40,937 for the six months ended September 30, 2011 and 2010, respectively.



13



5. Intangible Assets and Goodwill

The following tables reflect the components of intangible assets as of:

 
 
September 30, 2011
 
March 31, 2011
Amortizable asset management contracts
 
 

 
 

Cost
 
$
206,353

 
$
208,454

Accumulated amortization
 
(164,156
)
 
(155,136
)
Net
 
42,197

 
53,318

Indefinite–life intangible assets
 
 

 
 

Fund management contracts
 
3,753,480

 
3,753,657

Trade names
 
69,800

 
69,800

 
 
3,823,280

 
3,823,457

Intangible assets, net
 
$
3,865,477

 
$
3,876,775


As of September 30, 2011, management contracts are being amortized over a weighted-average life of 3.3 years. Estimated future amortization expense is as follows:

Remaining 2012
 
$
8,463

2013
 
14,085

2014
 
11,902

2015
 
2,987

2016
 
2,731

Thereafter
 
2,029

Total
 
$
42,197


The change in the carrying value of goodwill for the six months ended September 30, 2011, is summarized below:
 
 
 
Gross Book Value
 
Accumulated Impairment
 
Net Book Value
Balance as of March 31, 2011
 
$
2,473,552

 
$
(1,161,900
)
 
$
1,311,652

Impact of excess tax basis amortization
 
(10,605
)
 

 
(10,605
)
Other, including changes in foreign exchange rates
 
(18,999
)
 

 
(18,999
)
Balance as of September 30, 2011
 
$
2,443,948

 
$
(1,161,900
)
 
$
1,282,048


6. Long-Term Debt and Equity Units

The disclosures below include details of Legg Mason’s debt, excluding the debt of CIVs.  See Note 12, Variable Interest Entities and Consolidation of Investment Vehicles, for information related to the debt of CIVs.


14



The accreted value of long-term debt consists of the following:

 
 
September 30, 2011
 
March 31, 2011
 
 
Current Accreted Value
 
Unamortized Discount
 
Maturity Amount
 
Accreted Value
2.5% convertible senior notes
 
$
1,107,162

 
$
142,838

 
$
1,250,000

 
$
1,087,932

5.6% senior notes from Equity Units
 

 

 

 
103,039

Other term loans
 
10,506

 

 
10,506

 
10,897

Subtotal
 
1,117,668

 
142,838

 
1,260,506

 
1,201,868

Less: current portion
 
1,008

 

 
1,008

 
792

Total
 
$
1,116,660

 
$
142,838

 
$
1,259,498

 
$
1,201,076


As of September 30, 2011, the aggregate maturities of long-term debt, based on their contractual terms, are as follows:

Remaining 2012
 
$
595

2013
 
1,227

2014
 
1,277

2015
 
1,251,332

2016
 
6,075

Thereafter
 

Total
 
$
1,260,506

 
At September 30, 2011, the estimated fair value of long-term debt was approximately $1,259,200.

Legg Mason is accreting the carrying value of the 2.5% convertible senior notes to the principal amount at maturity using an interest rate of 6.5% (the effective borrowing rate for non-convertible debt at the time of issuance) over its expected life of seven years, resulting in interest expense of approximately $9,741 and $9,146 for the quarters ended September 30, 2011 and 2010, respectively, and $19,230 and $18,055 for the six months ended September 30, 2011 and 2010, respectively. The amount by which the notes’ if-converted value exceeds the accreted value, excluding accrued interest, using a current interest rate of 2.7% as of September 30, 2011, is approximately $141,532 (representing a potential loss).

The $103,039 of outstanding debt on the remaining 5.6% senior notes from Equity Units was retired on June 30, 2011, as part of a remarketing. Concurrently, Legg Mason issued 1,830 shares of Legg Mason common stock upon the exercise of the purchase contracts from the Equity Units.

7.  Stock-Based Compensation

Legg Mason’s stock-based compensation includes stock options, employee stock purchase plans, restricted stock awards and units, performance shares payable in common stock, and deferred compensation payable in stock.  Shares available for issuance under the active equity incentive plan as of September 30, 2011, were 12,998. On July 26, 2011, the equity incentive plan was amended to increase the available shares by 6,500. Options under Legg Mason’s employee stock plans have been granted at prices not less than 100% of the fair market value. Options are generally exercisable in equal increments over four to five years and expire within eight to ten years from the date of grant.
 
Compensation expense relating to stock options for the three months ended September 30, 2011 and 2010, was $3,500 and $4,449, respectively, and for the six months ended September 30, 2011 and 2010, was $7,681 and $9,081, respectively.
 

15



Stock option transactions during the six months ended September 30, 2011 and 2010, respectively, are summarized below:

 
 
Six Months Ended September 30,
 
 
2011
 
2010
 
 
Number
of shares
 
Weighted-average
exercise price
per share
 
Number
of shares
 
Weighted-average
exercise price
per share
Options outstanding at March 31
 
5,419

 
$
59.82

 
6,054

 
$
57.75

Granted
 
810

 
33.99

 
701

 
33.13

Exercised
 
(8
)
 
25.76

 
(350
)
 
26.25

Canceled/forfeited
 
(305
)
 
47.95

 
(318
)
 
45.56

Options outstanding at September 30
 
5,916

 
$
56.95

 
6,087

 
$
57.36

 
At September 30, 2011, options were exercisable for 3,426 shares with a weighted-average exercise price of $72.99 and a weighted-average remaining contractual life of 3.4 years.  Unamortized compensation cost related to unvested options (2,490 shares) at September 30, 2011, of $30,031 is expected to be recognized over a weighted-average period of 1.9 years.

The weighted-average fair value of option grants during the six months ended September 30, 2011 and 2010, using the Black-Scholes option-pricing model, was $13.13 and $14.38 per share, respectively.

The following weighted-average assumptions were used in the model for grants in fiscal 2012 and 2011:

 
 
Six Months Ended September 30,
 
 
2011
 
2010
Expected dividend yield
 
1.39
%
 
1.39
%
Risk-free interest rate
 
1.95
%
 
2.40
%
Expected volatility
 
47.16
%
 
52.83
%
Expected lives (in years)
 
5.12

 
5.18


Compensation expense relating to restricted stock and restricted stock units for the three months ended September 30, 2011 and 2010, was $8,533 and $8,685, respectively, and for the six months ended September 30, 2011 and 2010, was $16,608 and $16,068, respectively.

Restricted stock and restricted stock unit transactions during the six months ended September 30, 2011 and 2010, respectively, are summarized below:

 
 
Six Months Ended September 30,
 
 
2011
 
2010
 
 
Number of shares
 
Weighted-average grant date value
 
Number of shares
 
Weighted-average grant date value
Unvested shares at March 31
 
2,637

 
$
33.01

 
1,605

 
$
34.80

Granted
 
1,315

 
33.79

 
1,635

 
33.22

Vested
 
(700
)
 
33.86

 
(425
)
 
38.53

Canceled/forfeited
 
(42
)
 
33.06

 
(75
)
 
31.47

Unvested shares at September 30
 
3,210

 
$
33.14

 
2,740

 
$
33.37


Unamortized compensation cost related to unvested restricted stock and restricted stock unit awards at September 30, 2011, of $79,019 is expected to be recognized over a weighted-average period of 1.9 years.



16



Compensation expense relating to the stock purchase plan and deferred compensation payable in stock for the three months ended September 30, 2011 and 2010, was $108 and $99, respectively, and for the six months ended September 30, 2011 and 2010, was $284 and $302, respectively.

During the six months ended September 30, 2011 and 2010, non-employee directors were granted 12 and 17 restricted stock units and 31 and 31 shares of common stock at a fair value of $1,375 and $1,425, respectively. As of September 30, 2011 and 2010, non-employee directors held 193 and 220 stock options, respectively, which are included in the outstanding options presented in the table above. As of September 30, 2011 and 2010, non-employee directors held 74 and 62 restricted stock units, respectively, which vest on the grant date and are therefore not included in the unvested shares of restricted stock and restricted stock units in the table above.  During the six months ended September 30, 2011, non-employee directors did not exercise any stock options and no restricted stock units were distributed. During the six months ended September 30, 2010, non-employee directors exercised 9 stock options and 7 restricted stock units were distributed. During the six months ended September 30, 2011 and 2010, there were 27 and 59 non-employee director stock options canceled or forfeited, respectively.

During the June 2011 quarter, Legg Mason established a long-term incentive plan (the "LTIP") under its equity incentive plan, which provides an additional element of compensation that is based on performance. Under the LTIP, executive officers were granted cash value performance units that will vest at the end of a three year period based upon Legg Mason's cumulative adjusted earnings per share over the period. Awards granted under the LTIP may be settled in cash and/or shares of Legg Mason common stock, at the discretion of Legg Mason. The estimated amount of the award is being expensed over the vesting period based on a probability assessment of the expected outcome under the LTIP provisions.

As part of the Company's restructuring initiative, as further discussed in Note 11, the employment of certain recipients of stock option and restricted stock awards will be terminated. The termination benefits extended to these employees include accelerated vesting of any portion of their equity incentive awards that would not have vested by January 1, 2012, under the original terms of the awards. During fiscal 2011, the portion of the awards subject to accelerated vesting were revalued and are being expensed over the new vesting period, the impact of which is included above.

8. Commitments and Contingencies

Legg Mason leases office facilities and equipment under non-cancelable operating leases and also has multi-year agreements for certain services. These leases and service agreements expire on varying dates through fiscal 2025. Certain leases provide for renewal options and contain escalation clauses providing for increased rentals based upon maintenance, utility and tax increases.
 
As of September 30, 2011, the minimum annual aggregate rentals under operating leases and service agreements are as follows:
 
Remaining 2012
 
$
79,933

2013
 
138,880

2014
 
111,952

2015
 
99,243

2016
 
89,945

Thereafter
 
522,464

Total
 
$
1,042,417


The minimum rental commitments shown above have not been reduced by $150,319 for minimum sublease rentals to be received in the future under non-cancelable subleases, of which approximately 52% is due from one counterparty.  If a sub-tenant defaults on a sublease, Legg Mason may incur operating charges to reflect expected future sublease rentals at reduced amounts, as a result of the current commercial real estate market.

The above minimum rental commitments include $913,416 in real estate and equipment leases and $129,001 in service and maintenance agreements.

As of September 30, 2011, Legg Mason had commitments to invest approximately $39,592 in investment vehicles. These commitments are expected to be funded as required through the end of the respective investment periods through fiscal 2018.
 



17



In the normal course of business, Legg Mason enters into contracts that contain a variety of representations and warranties and that provide general indemnifications. Legg Mason’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against Legg Mason that have not yet occurred.

Legg Mason has been the subject of customer complaints and has also been named as a defendant in various legal actions arising primarily from securities brokerage, asset management and investment banking activities, including certain class actions, which primarily allege violations of securities laws and seek unspecified damages, which could be substantial. In the normal course of its business, Legg Mason has also received subpoenas and is currently involved in governmental and self-regulatory agency inquiries, investigations and, from time to time, proceedings involving asset management activities. In accordance with guidance for accounting for contingencies, Legg Mason has established provisions for estimated losses from pending complaints, legal actions, investigations and proceedings when it is probable that a loss has been incurred and a reasonable estimate of loss can be made.

In a transaction with Citigroup in December 2005, Legg Mason transferred to Citigroup the subsidiaries that constituted its Private Client/Capital Markets ("PC/CM") businesses, thus transferring the entities that would have primary liability for most of the customer complaint, litigation and regulatory liabilities and proceedings arising from those businesses. However, as part of that transaction, Legg Mason agreed to indemnify Citigroup for most customer complaint, litigation and regulatory liabilities of Legg Mason's former PC/CM businesses that result from pre-closing events. While the ultimate resolution of these matters cannot be currently determined based on current information, after consultation with legal counsel, management believes that any accrual or range of reasonably possible losses as of September 30, 2011 or 2010, is not material. Similarly, although Citigroup transferred to Legg Mason the entities that would be primarily liable for most customer complaint, litigation and regulatory liabilities and proceedings of the Citigroup Asset Management ("CAM") business, Citigroup has agreed to indemnify Legg Mason for most customer complaint, litigation and regulatory liabilities of the CAM business that result from pre-closing events.

One of Legg Mason's asset management subsidiaries was named as the defendant in a lawsuit filed by a former institutional client in late August 2011. The complaint alleges breach of contract and breach of fiduciary duty arising from investments in the former client's account allegedly being inconsistent with the account's objectives, and seeks damages in excess of $90,000. Legg Mason believes that the claims are without merit and intends to defend the matter vigorously. Because of the preliminary status of the matter, Legg Mason cannot estimate the possible loss or range of loss from this matter, if any. In addition, although Legg Mason believes that this matter would likely be covered by insurance policies that may substantially mitigate the amount of any eventual loss, as is not unusual with litigation at this point in the process, there can be no assurance that the action will not have a material effect on Legg Mason's financial position, results of operations or cash flows.

The ultimate resolution of other matters cannot be currently determined, and in the opinion of management, after consultation with legal counsel, Legg Mason believes that the resolution of these actions will not have a material effect on Legg Mason’s financial condition. Due in part to the preliminary nature of certain of these matters, Legg Mason is currently unable to estimate the amount or range of potential losses from these matters and the results of operations and cash flows could be materially affected during a period in which a matter is ultimately resolved. In addition, the ultimate costs of litigation-related charges can vary significantly from period-to-period, depending on factors such as market conditions, the size and volume of customer complaints and claims, including class action suits, and recoveries from indemnification, contribution or insurance reimbursement.

9. Earnings Per Share

Basic earnings per share (“EPS”) is calculated by dividing net income or loss attributable to Legg Mason, Inc. by the weighted-average number of shares outstanding. The calculation of weighted-average shares includes common shares, shares exchangeable into common stock and unvested restricted shares deemed to be participating securities. Diluted EPS is similar to basic EPS, but adjusts for the effect of potentially issuable common shares, except when inclusion is antidilutive.

In June 2011, Legg Mason issued 1,830 shares of common stock upon the exercise of purchase contracts on the remaining Equity Units. Of these shares, 1,830 and 930 shares are included in weighted-average shares outstanding for the three and six months ended September 30, 2011, respectively.

Legg Mason issued 56 and 1,303 shares of restricted stock related to its annual incentive awards, during the three and six months ended September 30, 2011, respectively. Of the shares issued in the six month period, 1,286 and 960 shares are included in weighted-average shares outstanding for the three and six months ended September 30, 2011, respectively.





18



The following table presents the computations of basic and diluted EPS:

 
 
Three Months Ended September 30,
 
 
2011
 
2010
 
 
Basic
 
Diluted
 
Basic
 
Diluted
Weighted-average basic shares outstanding
 
143,877

 
143,877

 
151,416

 
151,416

Potential common shares:
 
 
 
 
 
 
 
 
Employee stock options
 

 
54

 

 
111

Shares related to deferred compensation
 

 

 

 
413

Total weighted-average diluted shares
 
143,877

 
143,931

 
151,416

 
151,940

Net Income
 
$
57,383

 
$
57,383

 
$
76,588

 
$
76,588

Less: Net income attributable to noncontrolling interests
 
719

 
719

 
1,253

 
1,253

Net Income Attributable to Legg Mason, Inc.
 
$
56,664

 
$
56,664

 
$
75,335

 
$
75,335

Net Income per Share Attributable to
 Legg Mason, Inc. Common Shareholders
 
$
0.39

 
$
0.39

 
$
0.50

 
$
0.50


 
 
Six Months Ended September 30,
 
 
2011
 
2010
 
 
Basic
 
Diluted
 
Basic
 
Diluted
Weighted-average basic shares outstanding
 
146,529

 
146,529

 
155,746

 
155,746

Potential common shares:
 
 
 
 
 
 
 
 
Employee stock options
 

 
96

 

 
143

Shares related to deferred compensation
 

 

 

 
438

Total weighted-average diluted shares
 
146,529

 
146,625

 
155,746

 
156,327

Net Income
 
$
119,081

 
$
119,081

 
$
121,631

 
$
121,631

Less: Net income (loss) attributable to noncontrolling interests
 
2,465

 
2,465

 
(1,635
)
 
(1,635
)
Net Income Attributable to Legg Mason, Inc.
 
$
116,616

 
$
116,616

 
$
123,266

 
$
123,266

Net Income per Share Attributable to
 Legg Mason, Inc. Common Shareholders
 
$
0.80

 
$
0.80

 
$
0.79

 
$
0.79


During the three and six months ended September 30, 2011, Legg Mason purchased and retired 7,564 and 13,597 shares, respectively, of its common stock for $200,147 and $400,266, respectively, through open market purchases. The repurchases in the six month period reduced weighted-average shares outstanding for the three and six months ended September 30, 2011, by 9,736 shares and 5,835 shares, respectively.

The diluted EPS calculations for the three and six months ended September 30, 2011 and 2010, exclude any potential common shares issuable under the convertible 2.5% senior notes and, for the three and six months ended September 30, 2010, any potential common shares issuable under the convertible Equity Units, because the market price of Legg Mason common stock had not exceeded the price at which conversion under either instrument would be dilutive using the treasury stock method.

Options to purchase 5,379 and 5,504 shares for the three months ended September 30, 2011 and 2010, respectively, and 7,144 and 5,407 shares for the six months ended September 30, 2011 and 2010, respectively, were not included in the computation of diluted earnings per share because the presumed per share proceeds from exercising such options, including related unamortized cost and income tax benefits, if any, exceed the average price of the common shares for the period and therefore the options are deemed antidilutive.



19



10. Derivatives and Hedging

The disclosures below detail Legg Mason’s derivatives and hedging excluding the derivatives and hedging of CIVs. See Note 12, Variable Interest Entities and Consolidation of Investment Vehicles, for information related to the derivatives and hedging of CIVs.

Legg Mason uses currency forwards to economically hedge the risk of movements in exchange rates, primarily between the U.S. dollar, euro, Australian dollar, Canadian dollar, Brazilian real, Singapore dollar, Japanese yen, and Great Britain pound. In the Consolidated Balance Sheets, Legg Mason nets the fair value of certain foreign currency forwards executed with the same counterparty where Legg Mason has both the legal right and intent to settle the contracts on a net basis. Legg Mason has not designated any derivatives as hedging instruments during the periods ended September 30, 2011 and 2010.

Legg Mason uses market hedges on certain seed capital investments by entering into futures contracts to sell index funds that benchmark the hedged seed capital investments. Open futures contracts required cash collateral of $3,529 and $7,099 as of September 30, 2011, and March 31, 2011, respectively.  

The following table presents the fair values as of September 30, 2011, and March 31, 2011, of derivative instruments not designated as hedging instruments, classified as Other assets and Other liabilities in the Consolidated Balance Sheets:
 
September 30, 2011
March 31, 2011
 
Assets
Liabilities
Assets
Liabilities
Currency forward contracts
$
8,417

$
1,056

$
1,112

$
1,633

Futures contracts
998

25

57

1,487

Total
$
9,415

$
1,081

$
1,169

$
3,120


The following table presents gains (losses) recognized on derivative instruments for the three and six months ended September 30, 2011 and 2010:
 
 
Three months ended September 30,
 
 
2011
2010
 
Income Statement Classification
Gains
Losses
Gains
Losses
Currency forward contracts for:
 
 
 
 
 
Operating activities
Other expense
$
5,047

$
(2,835
)
$
982

$
(3,244
)
Seed capital investments
Other non-operating income (expense)
401

(29
)

(328
)
Futures contracts
Other non-operating income (expense)
5,964